3 posts from July 2014

One more call for ethanol

Ethanol’s popularity has swung dramatically over the past decade. It went from being touted as the answer to oil dependency and a savior for rural economies to getting derided as a waste of corn that drove up the price of food while providing questionable environmental benefits. One criticism directed at ethanol was that it wouldn’t be as competitive an energy source if it didn’t benefit from hefty government subsidies.

The latter criticism got put to the test beginning in 2012. That was when the federal blenders’ tax credit, the primary subsidy to ethanol production, was discontinued after Congress opted not to renew it. And indeed, national production of ethanol peaked in late-2011 and went into decline after the credit expired (see Chart 1).

Ethanol CH1 -- 7-24-14

However, production has been on the increase during the last year, nearly returning to the pre-expiration peak over the three months from December 2013 through February 2014 (the USDA tracks quarterly ethanol production by marketing year, which goes from September through August).

The likely reason for this rebound is that, in spite of the end of the tax credit, other market conditions have turned favorable for ethanol producers. In particular, the price of corn used to produce ethanol has dropped sharply from its late-2012 peak (see Chart 2). The price of the fuel itself hasn’t dropped nearly as much as this input cost, pushing up profit margins for distillers, while the price of gas—a substitute—has remained elevated over the same period.

This all adds up to happy news for distillers, and the good times are likely to continue; the USDA forecasts corn prices to stay down this year and also projects that more corn will be used to produce ethanol than in any previous year.

Ethanol CH2 -- 7-24-14

 

Made in (but not owned by) the USA

Investment is typically seen as a sign of economic strength, as people and financial entities put their money where they believe it can be most productive and profitable. Foreign direct investment (FDI) tracks the amount of money international firms invest in the United States, and a recent report on the matter by the Brookings Institution shows that it’s growing in the Ninth District, but not as fast as it is elsewhere in the country.

In 2013, for example, companies invested $1.46 trillion in locations outside their home country, and the United States is the single largest destination of that capital, receiving $193 billion, according to the report. This investment manifests itself in many forms: spreading technology, facilitating the exchange of knowledge and inducing new trade.

It also employs millions of people, which the Brookings report investigated more closely. Among Ninth District states, the trends are somewhat diverging. In five Ninth District states (cumulative), total employment at foreign-owned establishments (FOEs) grew by about 50 percent from 1991 to 2011, and the share of total private employment at FOEs increased as well (see Chart 1). The growth in this share of employment tended to be modest—about one-half of a percentage point—with the exception of North Dakota, whose share of FOE employment tripled over this period, most likely as a result of foreign firms investing resources in (and hiring workers for) the Bakken oil patch.

However, across the board, district states have a lower share of FOE employment than the national average and (with the exception of North Dakota) saw less growth in the share of FOE employment. As a result, most distrct states fell in ranking among their peers in FOE’s share of total private employment (see table embedded in Chart 1).

One caveat to FDI trends: Much of this investment is the result of acquisitions or mergers of U.S. companies by international firms. So a considerable amount of the resulting “growth” in FOE employment is a methodological quirk—namely, a shift in the nationality of the parent company. This was particularly the case in North Dakota. Among district states, only Wisconsin was close to the national average in the share of FOE employment growth coming from new openings (see Chart 2).

FDI Ch1-2

Coal producers fire up exports

District coal producers are fighting to retain market share in a national power generation industry that derives an increasing share of its energy input from alternative sources. One survival strategy that has gained traction recently is exporting to Asian countries with a large and growing appetite for coal.

Over the past half-decade, coal’s position as the dominant feedstock for power plants has been eroded by cheap natural gas, increasingly competitive renewables and stringent federal air quality regulations that have rendered many coal-burning plants too costly to operate. In 2008, 48 percent of U.S. power generation was coal-fired, according to the Energy Information Administration; in 2013, coal’s share was 37 percent.

Many coal producers have turned to foreign markets to offset an overall drop in domestic coal consumption. In Montana, the go-to export destinations are South Korea, Taiwan and Japan. “There’s huge demand for coal in southeastern Asian countries for power generation,” said Bud Clinch, executive director of the Montana Coal Council, an industry trade association.

Subbituminous coal from southeastern Montana is cheaper than coal from many other parts of the country, and its high energy content makes it economical to ship overseas via rail and cargo ship. (No coal is exported from North Dakota; the total output of the state’s lignite mines goes to local power plants.)

Since 2009, Montana coal exports have increased sharply, mostly due to shipments from the Spring Creek mine outside Decker, near the Wyoming border (see chart). Over 40 percent of Montana coal comes from this mine, owned by Cloud Peak Energy of Wyoming. In 2013, Spring Creek exported 4.7 million tons to East Asian customers—triple the amount from 2009—mainly through a coal terminal in the Canadian port of Vancouver.

Signal Peak Energy’s Bull Mountain mine near Roundup, Mont., also exports coal, and developers of the proposed Otter Creek coal mine southeast of Ashland, Mont., plan to ship coal to Asia via a new rail link to BNSF’s Colstrip terminal.

But limited port capacity on the Pacific Coast constrains coal exports from Montana and other western states. Ramping up shipments depends on the opening of new coal export terminals in Oregon and Washington state—projects that face opposition from environmental groups concerned about global warming and the impact of coal handling on local air and water quality.

For more on other mining activity in the district, look for the upcoming July issue of the fedgazette

Coal exports -- 7-3-14